In the early stages of your startup? Bootstrapping cash? Need extra hands on deck? If all of the above are true, you’ve likely considered hiring an unpaid intern, but have you considered the legal consequences of misclassification or what to include in the Learning Contract? Probably not, and that’s why you’re here, so let’s get to it.
Fair Labor Standards Act, New Guidelines for Hiring Interns.
The Fair Labor Standards Act (or FLSA) by the Department of Labor sets minimum required standards for companies that hire workers (contractors, interns, employees). The Act dictates how a company can incorrectly classify a worker and, if the company, in fact is subject to misclassification, how the prior employee can recover damages against the company. If your startup decides to hire an intern, whether paid or unpaid, it must ensure proper classification under the FLSA. Always check your state law requirements!
In 2017, to discourage unpaid internships and encourage paying students at least minimum wage, the Department of Labor issued an opinion regarding the New Federal Guidelines on Internships. The following six legal criteria must be applied when making a determination if an internship is required to be paid.
- The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
- The training is for the benefit of the trainee;
- The trainees do not displace regular employees, but work under close observation;
- The employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion the employer’s operations may actually be impeded;
- The trainees are not necessarily entitled to a job at the completion of the training period; and
- The employer and the trainee understand that the trainees are not entitled to wages for the time spent in training.
[Source: Department of Labor, FLSA Opinion, Office of Enforcement Policy]
Set on hiring an unpaid intern?
To best protect your startup from misclassification, you should provide your intern with a ‘Learning Contract’ to sign before starting work that represents the nature of the unpaid internship relationship. A Learning Contract is only enforceable for private, for-profit businesses. The contract stipulates the parties expectations with an explicit acknowledgement that the internship is unpaid and there is no promise of employment. As always, you should consult with your attorney before the intern and an authorized company agent signs the agreement. The contract should be short and easy for the student to understand, but here are a few things we recommend you include:
- Letterhead. Make it official and represent that the document is a formal contract. Put your company’s logo, address, and company phone number in the header of the document.
- Address the letter to the intern by his/her name and address. Include a subject that reads: Unpaid Internship “Agreement” or “Memorandum of Understanding”.
- Include a start and end date. In the agreement, explicitly state that the internship starts on “X” date and finishes on “Y” date. Include a clause that reserves the right for the company or intern to terminate the unpaid internship for any cause and at any time.
- School supervision. If you are conducting the unpaid internship through a school program for an externship experience (for-credit), degree requirement, or supervised learning project, say so in the agreement! Mention the specific faculty advisor’s name, the office in charge of the internship placement, and what the student will receive as a result (course credit, learning purposes, professional development, field exposure, etc).
- Internal feedback loop. To ensure a true learning experience, the FLSA requires that the student receive at minimum three evaluations throughout the experience. Include the feedback loop process in the agreement, including a schedule of two weeks from the start date, half way, and at the conclusion of the placement. Schedule these meetings in both your and the intern’s calendars and don’t miss them.
- Compliance with policies and confidentiality. Include a clause that stipulates the student will comply with all company policies and will sign a confidentiality agreement, if required by the company.
- Assignment of all work product to the company. Include a clause that assigns all inventions, intellectual property, and work product created by the unpaid intern during the term of the relationship to the company from the start of the internship. This is especially important if the intern will create any intellectual property for the company. If you have a Proprietary Information and Inventions Assignment agreement (you should!), include that the unpaid intern agrees to sign that document, too.
We know that is a lot but it is worth the trouble and money that misclassifying an unpaid intern could cost you in the future. We recommend that you are thoughtful about the type of work, experience, and takeaways an intern receives while at your startup to meet the six FLSA requirements; and, ensure compliance with your state law and federal law.